Costco discounted on rivals’ deals, Deutsche Bank downgrade

Fresh off of big announcements from rival retailers Amazon and Walmart, Costco is struggling to get its shine back.

The US-based wholesale retailer saw its shares decline than 1.6 per cent on Monday after having fallen more than 7 per cent in Friday’s session. Monday’s decline came after Deutsche Bank analysts downgraded their view on its shares from buy to hold.

That extended the steep drop from Friday, when Costco was among numerous consumer-staple companies to be hammered as investors fretted about what competition they might soon face from a prospective combination of digital retail giant Amazon and upscale grocery chain Whole Foods in a $13.7bn proposed deal. Altogether, since Thursday, Costco has lost $7.6bn of its value.

Playing second fiddle to Amazon’s announcement, US retail heavyweight Walmart unveiled a digital deal of its own on Friday, announcing that it was snapping up online men’s apparel business Bonobos for $310m.

All that dealmaking has left Costco looking uninspired at the moment, particularly with year-over-year growth in online sales just cracking 11 per cent apiece in its past two quarters, Deutsche Bank analysts Paul Trussell and Tiffany Kanaga wrote in Monday’s report.

That compares to the 63 per cent growth in e-commerce sales that Walmart saw in its most recent quarter, as it attempts to shore up its reliance on brick-and-mortar stores with a growing online presence — including through the acquisition of focused digital-first sites like Jet.com and Bonobos.

“We are concerned the digital platform is underperforming in price perception (each item includes a shipping surcharge), innovation, and fresh food (available through Instacart and Shipt in select areas) which could put Costco at a meaningful disadvantage over time, especially as Amazon Prime builds its value proposition”, DB analysts wrote.

Costco has plotted a steady course of growth by selling memberships to its warehouse-like stores. It has managed to impress Wall Street with positive traffic trends and margin growth, DB analysts said in their note.

But its “pipeline of positive catalysts has played out and the competitive background is intensifying with Amazon and Walmart accelerating in-store and online efforts and innovation”, the report said.

“The Whole Foods acquisition represents a game changer with Costco’s competitive moat in grocery under greater threat while its digital platform lags peers, putting membership renewal at risk for decline. Costco is still a relative winner in retail with positive traffic trends and healthy core margins, but we go to the sidelines with balanced risk/reward.”

Even though it traffics in everything from paper towels to televisions, groceries have “been an important competitive moat” for Costco, which could come under pressure as Amazon breaks into the food business and Walmart implements its own efforts to stay two steps ahead of the emerging rival.

Nevertheless, DB analysts said that it’s too soon to count Costco out, particularly as it has weathered a brutal retail environment better than most: “Despite the aforementioned challenges, we do still view Costco as a relative winner in a very tough retail landscape and worthy of a valuation premium with positive traffic trends, healthy core margins, global growth, and an attractive shareholder return story.”